2017-12-05 00:00:00 Franchising English Create a solid franchise startup plan when you take into account these common fees and investment costs. https://d1bkf7psx818ah.cloudfront.net/wp-content/uploads/2017/12/22101150/Businessman-Trackng-Startup-Costs-Franchise.jpg Franchise Startup Costs

Franchise Startup Costs

4 min read

Franchises are a major part of the Canadian economy, generating approximately $68 billion annually and employing over 1 million Canadians, according to the Canadian Franchise Association. With one in 14 working Canadians employed directly or indirectly by Canada’s over 78,000 franchises, these businesses offer exciting opportunities for entrepreneurs, and they’re not just limited to fast food. As of 2017, 60 percent of franchises in Canada are for businesses outside of the food industry. If you want a piece of this vibrant sector of the economy, first you need to know what it takes to get started, and this can vary widely depending on your financial situation and franchising ambitions.

Franchise Fees

Typically, franchisors charge a flat fee up front for the right to use their brand. The franchise fee can range from as little as a few thousand dollars to over $75,000, depending on the industry, brand, location, and other factors, such as the expansion goals of the franchisor. You may decide to open a franchise under a reputable, high-end brand, but you should expect to pay a premium for that brand’s value. Even for the casual consumer market, which includes businesses such as fast food chains, there can be a considerable difference in franchise fees based on the clout of the brand. You can expect to pay almost one-and-a-half times the franchise fee for an internationally known brand, such as Taco Bell, than you would for a Canadian franchise, such as Tim Hortons.

Other Requirements

Larger brands also often have more stringent requirements for the type of investor they are seeking. If you want to open a single Tim Hortons in Canada, you can do so if you meet the financial requirements, but Taco Bell and McDonald’s do not even consider applicants that do not have plans for multiple locations.

Big brands can also afford to be choosier about the financial status of the prospective franchise owner and may set higher requirements for your personal finances. Franchisors want to know you have the financial security to keep the business running regardless of market fluctuations, especially since many businesses are not profitable for a year or even more after opening. Expect to provide proof of your net worth and liquidity and meet minimum requirements for both.

Initial Investment

Franchisors typically tell you upfront what you should expect to invest to get your business running. They may require that some percentage of this initial investment is in liquid assets, such as cash and short-term bonds, so you don’t get too deeply into debt establishing your new business.

If you don’t need to lease, purchase, renovate or build property to run your business, you may be able to get away with an investment of less than $10,000. This makes franchises that allow you to work from home or on the road a good option for entrepreneurs with limited capital and assets. On the other end of the spectrum, if your dream is to open your own hotel franchise, expect to spend $5 million or more to purchase the property and build on it.

Most franchises fall somewhere between these extremes. The cost of leasing or building an operating facility varies based on the property costs in your location, but many costs are fairly standard across locations, so you can use the franchisor’s resources to budget for these costs. You may already be budgeting for anticipated physical costs, such as refurbishing the property, stocking it with equipment and supplies, and updating signage and branding, but also keep in mind the labor and service costs of starting a new business. Insurance, legal, and accounting services are essential for many successful franchises, and don’t forget to budget for initial employee recruitment and training costs.

Fees on Sales

The moment you make your first sale is an exciting one, and it’s also the beginning of your ongoing financial obligation to the franchisor. You need to plan your startup budget accordingly. Expect to pay a percentage of your gross sales to the franchisor as a royalty fee. That’s typically in the range of 4 to 8%. Franchises also frequently require you to share in the cost of advertising the brand, and these fees typically fall between 2 and 4% of your gross sales. Depending on the franchise, you may also have to pay additional rent for equipment or other regular operating fees. So, when you make your startup plan, be sure to leave some liquid cash in your startup budget for any flat fees or royalties on gross sales. Remember, you incur those fees from day one, even if you don’t see a profit in the early days of your operation.

Regardless of who you enter into a franchise agreement with, remember that the brand holder is as invested in your success as you are. While it may be overwhelming to take into consideration all of the startup costs, which can range from major costs such as leasing property to small costs such as stocking enough plastic straws, franchisors make it their business to take most of the unpredictability out of the process to ensure mutual success. Make use of their franchise resources, which can include startup guides as well as ongoing training and support, to ensure your startup budget sets you up for success.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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